Artful Dodge: Why Chinese Collectors Are ‘Borrowing’ Their Own Pieces

This “chicken cup” was created between 1465 and 1487 and is one only 19 known to still exist.

Courtesy of Sotheby’s

Shanghai-based art collector Liu Yiqian stirred controversy earlier this month when he took a sip of tea from the $36.3-million Ming-dynasty tea cup he bought in a heated Hong Kong auction. But Mr. Liu’s trip to Hong Kong to fetch the rare “chicken cup” – so called because of the chicken painted on its surface – is interesting not just for what he did when he picked it up.

It’s also noteworthy because of where he took the cup next.

Rather than take it home, he had it sent instead to West Bund, a bonded art warehouse in Shanghai’s Xu Hui neighborhood. He then “borrowed” the cup from the warehouse for use in his private museum for six months, after which he will take it back to the warehouse, then “borrow” it for another six months, and so on.

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Liu Yiqian takes a sip from his cup in Hong Kong before sending it to a warehouse in Shanghai.

Courtesy of Sotheby’s

The aim of all that back-and-forth, which could in theory continue in perpetuity: to avoid paying roughly $6.2 million in value-added taxes.

“If I want to bring this cup back home forever, I’d need to pay the full value-added tax,” Mr. Liu told China Real Time. “It’s more convenient to put it at the warehouse.”

Mr. Liu is not alone. Many in the country’s swelling ranks of art collectors engage in a similar tax-dodging dance, costing the country untold millions while fueling a minor boom in art-focused bonded warehouses. The reason, the art collectors argue, is China’s antiquated tax regime.

According to China Customs regulations, virtually all types of goods imported into the country, including works of art and antiques, are subject to a 17% value-added tax, or VAT. That’s in stark contrast to most major economies, which typically offer tax reductions for fine art imports. The U.K., for example, charges a 5% VAT, while U.S. Customs levies an import duty of 6.6% only on items less than 100 years of age (older items get in duty-free). Hong Kong, meanwhile, has no import duties or value added taxes whatsoever.

In 2012, China followed the U.S. in scrapping import duties for works of art and antiques over 100 years old, saving art Chinese collectors between 6% and 12%. But the VAT remains, and it unfairly punishes collectors who are trying to bring China’s cultural treasures back home, according to Mr. Liu.

“I’m not saying I don’t want to pay taxes, but it’s just not fair to us private collectors,” he said, pointing out that government agencies and state-funded museums are exempt from all duties and taxes when importing Chinese artifacts from abroad.

Chinese Customs only allows art works to be imported on an exhibition license for half a year. Previously, Mr. Liu said, he used to fly his art collection down to Hong Kong every six months to get a “visa” for each piece, flying the whole lot back the next day. The growth of bonded warehouses in Shanghai means he no longer has to do that.

Mr. Hu Huanzhong, the manager of another bonded warehouse Mr. Liu uses, Shanghai Waigaoqiao International Culture and Art Development Co. Ltd, said the turn-around time is quick. “When the half-year exhibition period expires, he can come to us and it will take less than two days to get permission for him to take [items] out again,” he said. “Two days is negligible.”

Since tax-dodging is not a topic most are willing to talk about openly, it’s difficult to say exactly how many collectors have started using such warehouses or how much tax money the government has lost as a result. The market is large enough, however, for state-run conglomerate Gehua to include art-storage warehouses in its proposal for a 5-billion-yuan tax-free art zone near the Beijing airport.

“Almost all of my clients pour out their grievances to me. None of them want to pay the taxes,” said Andy Xie, an art-focused investment adviser at China Minsheng Bank. The system has created a situation in which replicas of some works, created as a way to fool customs officials, have begun to circulate on the market. “To solve the problem, you should just lower the taxes,” Mr. Xie said.

That’s unlikely to happen any time soon, according to Mr. Hu, since in the government’s eyes, the works are goods that can be bought and sold on the open market, just like Louis Vuitton bags or cans of foreign milk powder.

“When rich people buy those high-price art pieces, you don’t know whether they will eventually sell it,” he said, rejecting Mr. Liu’s complaints that museums have an unfair advantage. “State-owned museums can’t sell.”

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